RISK DASHBOARD. July

Transcription

1 EIOPA-BoS/ July 218 RISK DASHBOARD July Risks Score Trend 1. Macro risks Medium 2. Credit risks Medium 3. Market risks Medium 4. Liquidity and funding risks Medium 5. Profitability and solvency Medium 6. Interlinkages and imbalances Medium 7. Insurance (underwriting) risks Low Market perceptions Score Trend 8. Market perceptions Medium Key observations: - Macro risks declined from high to medium level, reflecting the improvement in recent economic data and the ongoing normalization of monetary policy. Nonetheless, persisting low yields and recent adverse developments such as increased protectionism should not be neglected. - Higher volatility in bond markets since March led to an increase in market risks. Spreads increased across all bond segments but credit risk remains at medium level. - Profitability and insurance risks benefited from the fading out of the impact of last year s natural catastrophes on (re)insurers technical results. Solvency ratios remain robust, though the reliance of some life insurers on transitional measures is high. - Market perceptions were marked by an overall positive change in insurance groups external rating outlooks, which was counterbalanced by an underperformance of insurance stocks relative to the overall market. 1 Reference date for company data is Q1-218 for quarterly indicators and 217-YE for annual indicators. The cut-off date for most market indicators is mid-june 218.

2 Macro risks Level: medium Trend: decrease Macro risks are down from high to medium level. This decrease in assessed risk reflects the improvement in recent economic data and the ongoing reduction in quantitative easing by major central banks. The continuing low level of interest rates as well as concerns about the strength of economic recovery due to for e.g. increased protectionism weight on the risk assessment. The indicator on forecasted GDP growth slightly declined since the previous assessment. This was due to both downward revisions in predicted growth and a slower pace of recovery expected in early 219 for most major economic areas. Unemployment rates are still reducing across major economic areas, with the weighted average indicator reaching 6.3%. GDP consensus forecast Unemployment rate Note: Average of forecasts four quarters ahead, weighted average for Euro area, United Kingdom, Switzerland, United States, BRICS. Source: Bloomberg Finance L.P. The indicator on fiscal balances is now above 2%, reflecting mostly a continued reduction in the EU budget deficit. Fiscal balance Note: Weighted average for EU, Switzerland, United States, China. Source: Bloomberg Finance L.P. The indicator on forecasted inflation is at 2%, broadly unchanged since the previous assessment. CPI consensus forecast % % 1.2%.8%.4%. Note: Weighted average for EU and United States. Source: Bloomberg Finance L.P. Note: Average of forecasts four quarters ahead, weighted average for Euro area, United Kingdom, Switzerland, United States, BRICS. Source: Bloomberg Finance L.P. 2

3 Swap rates remained broadly unchanged since March. EUR rates slightly decreased and USD rates slightly increased. The indicator on credit-to-gdp gap is barely unchanged since the previous assessment, remaining at around -11% and reflecting mostly the still negative gaps in the Euro area, US and UK. 1Y swap rates Credit-to-GDP gap 1.6% 1.4% 1.2% 1..8%.6%.4%.2% Note: Weighted average for EUR, GBP, CHF, USD. Source: Bloomberg Finance L.P. The indicator on the state of monetary policy signals a significant reduction in risk in Q1-218, due mostly to a considerable contraction in the pace of expansion of Central Banks balance sheet assets. Policy rates increased in the US. State of monetary policy Note: Weighted average for Euro area, United Kingdom, Switzerland, United States, China. Source: BIS Change in Balance Sheet (yoy, lhs) Policy Rate (rhs) Note: Weighted average for Euro area, United Kingdom, Switzerland, United States. Source: Bloomberg Finance L.P. 3

4 Credit risks Level: medium Trend: constant Credit risks remain unchanged at medium level. Since the previous assessment, spreads have increased across all bond segments. For financial corporate bonds the increase in spreads could be linked with the significant underperformance of the financial sector equity indices relative to the overall market. Nonetheless, there are still concerns about potential risk mispricing. Household indebtedness is high, but insurers exposures to housing mortgages and other loans are overall limited. Exposures to government bonds remained overall unchanged, with the median exposure at around 31%. CDS spreads increased in Europe since March, though this has been driven by sovereign bond markets developments in only some countries. Exposures to unsecured financial bonds remained broadly unchanged since Q4-217, with a reported median exposure of around 8%. Spreads increased considerably since March, which could possibly be linked with the relative underperformance of the financial sector equity indices. Investments in government bonds Investments in corporate bonds - financials, unsecured Phasing-in of SII data % 14% 12% 1 8% 6% 4% 2% Phasingin of SII data DS EUROPE SOVEREIGN 5Y CDS INDEX (E) - CDS PREM. MID (rhs) SNRFIN CDSI GEN 5Y Corp (rhs) Note: Left scale shows the distribution of exposures (interquartile range and median), right scale the risk measure. Source: Bloomberg Finance L.P., QFG (N218 Q1=97); QFT prior to 216 Insurance groups investments in secured financial bonds remained largely at the same levels as in the previous assessment. Spreads increased for this segment, but slightly less than for unsecured financial bonds. Note: Left scale shows the distribution of exposures (interquartile range and median), right scale the risk measure. Source: Bloomberg Finance L.P., QFG (N218 Q1=62); QFT prior to 216 Median exposures to non-financial corporate bonds decreased from 12. to 1.9%. Spreads have increased in tandem with a general increase in yields across several credit quality segments. Investments in corporate bonds - financials, secured Investments in corporate bonds - non-financials 12% 1 8% 6% 4% 2% Phasingin of SII data Phasingin of SII data Spread of cov. bond index over swap rate (rhs) LECFOAS Index (rhs) Note: Left scale shows the distribution of exposures (interquartile range and median), right scale the risk measure. Source: Bloomberg Finance L.P., QFG (N218 Q1=62); QFT prior to 216 Note: Left scale shows the distribution of exposures (interquartile range and median), right scale the risk measure. Source: Bloomberg Finance L.P., QFG (N218 Q1=62); QFT prior to 216 4

5 214-Q3 214-Q4 215-Q1 215-Q2 215-Q3 215-Q4 216-Q1 216-Q2 216-Q3 216-Q4 217-Q1 217-Q2 217-Q3 217-Q4 Exposures to loans and mortgages to individuals remain broadly unchanged, with a median exposure of only.7%. Household indebtedness is still high, as evidenced by the debt-to-income ratio of 12.. The median average rating of investments remained at a credit quality step of around Investments in loans and mortgages to individuals Average rating of investments (credit quality step) Household debt-to-income ratio (in %, rhs) Note: Left scale shows the distribution of exposures (interquartile range and median), right scale the risk measure (weighted average of EA and UK). Source: QFG (N218 Q1=97), ECB The indicator on fundamental credit risk still signals a possible risk mispricing, as evidenced by the still negative correlation between the debt-service ratio of non-financial corporations and corporate bond spreads. Source: QFG (N218 Q1=89) Fundamental credit risk Debt-service ratio NFCs (lhs) Correlation DSR - corp bond spreads (rhs) Note: Correlation between the debt-service ratio of nonfinancial corporates and the spread of non-financial corporate bonds based on a 12-quarter rolling window. Source: BIS, Bloomberg Finance L.P. 5

6 Market risks Level: medium Trend: increase Market risks increased since the previous assessment, but remain at a medium level. The increase in assessed risk is mostly due to higher volatility in European bond markets since March. Insurance groups investments in different asset classes remained broadly unchanged. Exposures to bonds remain overall stable in Q Bond volatility has considerably increased since March potentially due to increased political uncertainty. Volatility of equity prices has reduced after the peak in February, but remained above the low levels witnessed during most of 217. Exposures to equity remained overall stable, though Q1-218 Solvency II data reports a minor increase in median exposures (+.5 p.p.). Investments in bonds Investments in equity % 11% 9% 7% 3% 1% -1% Bund Yield Volatility Index (rhs) VSTOXX/1 (rhs) Price to Book Value Ratio (rhs) Note: Left scale shows the distribution of exposures (interquartile range and median), right scale the risk measure. Source: Bloomberg Finance L.P., QFG (N218 Q1=97) Exposures to property remained overall stable since the previous assessment, as well as rental yields for both office and retail. Note: Left scale shows the distribution of exposures (interquartile range and median), right scale the risk measure. Source: Bloomberg Finance L.P., QFG (N218 Q1=97); QFT prior to 216 The indicator on the concentration of assets is barely unchanged when compared to Q Median concentration of assets remains around 4. Investments in property Concentration of assets 8% 7% 6% 4% 3% 2% 1% Rental yields, EU, office and retail (rhs) Note: Left scale shows the distribution of exposures (interquartile range and median), right scale the risk measure. Source: Bloomberg Finance L.P., QFG (N218 Q1=97); QFT prior to 216 Note: Herfindal Hirshman index computed on six balance sheet asset classes (government bonds, corporate bonds, equities, properties, cash and cash equivalents and loans and mortgages). Distribution of indicator (interquartile range, median). Source: QFG (N218 Q1=98) 6

7 215-Q1 215-Q2 215-Q3 215-Q4 216-Q1 216-Q2 216-Q3 216-Q4 217-Q1 217-Q2 217-Q3 217-Q4 218-Q1 Liquidity and funding risks Level: medium Trend: constant Liquidity and funding risks remain constant at medium level. Funding indicators show slightly easier funding conditions for insurance groups in Q1-218, as depicted by the decrease in the average coupon to maturity indicator and the increase in announced issuance volumes of catastrophe bonds. Median cash holdings relative to total assets remain only slightly above 1%. Minor upward shifts in the 25 th and 75 th percentiles have been reported for Q The distribution of the liquid assets ratio remained stable since the previous quarter. Liquid assets represent around 68% of total assets (median figures). Cash holdings Liquid assets ratio Source: QFG (N218 Q1=97) Bond issuance has decreased from around 7.8 to 6.1 billion EUR in Q The average coupon to maturity indicator also declined. Source: QFG (N218 Q1=97) Cat bond issuance has increased since Q4-217 and is among the highest levels observed in the last 3 years. Issued volumes were 48% higher than announced, but the average multiplier increased from around 2 to 3 in Q Bond issuance Cat Bond Issuance 1, 9, 8, 7, 6, 5, 4, 3, 2, 1, , 7, 6, 5, 4, 3, 2, 1, increase in announced volume (USD mn, lhs) Note: Volume in EUR mn. Source: Bloomberg Finance L.P Issued volume (mill EUR, lhs) Average Coupon / Maturity (rhs) announced volume (USD mn, lhs) multiplier (spread / expected annual loss) (rhs) Note: Volumes in USD mn, spread in per cent Source: 7

8 Lapse rates in life business remained overall unchanged across the whole distribution since 216. Median lapse rates are still around 3% Lapse rate (life) Source: QFG (N217 Q4=91) Profitability and solvency Level: medium Trend: constant Profitability and solvency risks remained unchanged at medium level. Profitability of the non-life segment returned to normal levels after the fading out of the impact of last year s natural catastrophes on their combined ratios. Overall, solvency ratios remain robust and improved slightly for groups and both life and non-life undertakings. Nevertheless, some life insurers reliance on the use of transitionals to meet solvency capital requirements continues to be high. A downward shift in the distribution of combined ratios is observed in Q1-218, possibly due to the fading out of the impact of the natural catastrophes occurred in the second half of last year on (re)insurers technical results. Median net combined ratio is below 1 at 98%. The indicator on assets over liabilities remains quite stable, with a median close to 112%. Net combined ratio - non-life Assets over liabilities % 112% 18% 14% 1 Source: QRS (N218 Q1=1399) Source: QFG (N218 Q1=97) 8

9 The return on the excess of assets over liabilities (used as a proxy of return on equity) for Q4 217 improved for the 75 th percentile (+3.8 p.p.) but slightly declined for the median (-.5 p.p.). The median return on assets has slightly decreased when compared to Q2 217, but is at the same level as in Q Return on excess of assets over liabilities 1.2% 1..8%.6%.4%.2%. Return on assets Source: QFG (N217 Q4=93) The return to premiums indicator has decreased across the whole distribution when compared to Q2 217, but changed only slightly from Q Source: QFG (N217 Q4=93) Q1-218 Solvency II data indicates a slight improvement in median SCR ratios of insurance groups (+9 p.p.) and also in the lower end of the distribution. Return to premiums SCR ratio - groups Source: QFG (N217 Q4=93) The distribution of SCR ratios for non-life companies has remained overall stable since the previous quarter. Source: Total QFG (N218 Q1=96) SCR ratios for life companies show a slight improvement in Q1 both for the median (+2 p.p.) and the 25 th percentile (+3.7 p.p.). SCR ratio - non-life SCR ratio - life Source: QRS (N218 Q1=1,16) Source: QRS (N218 Q1=473) 9

10 The median SCR ratio of life solo companies excluding the impact of transitional measures remained close to 15 in 217. The indicator remains above 1 for most life insurers in the sample. The median share of Tier 1 in total own funds has remained close to 8 in Q Solvency ratio - life (without transitionals) Tier 1 own funds to total own funds Source: ARS (N217=299) Source: QFG (N218 Q1=98) 1

11 Interlinkages & imbalances Level: medium Trend: constant Interlinkages and imbalances risks remain constant at medium level. Since the previous assessment, the investment exposures to banks, insurers and other financial institutions remained overall stable. 217 year-end figures for reinsurance concentration show a slight improvement in the median, but also a worsening of the 75 th percentile, indicating higher concentration for some undertakings. Investment exposures to banks remain overall stable, with a median exposure of 9%. Exposures to other insurers remain stable at very low levels. The median investment exposure is close to only 1%. Investments in banks Investments in insurances % 3% 2% 1% The methodology has been amended from the previous release and exposures applied retrospectively. Source: QFG (N218 Q1=93) Median exposures to other financial institutions remain close to 1. Source: QFG (N218 Q1=94) Insurers investments in domestic sovereign debt are broadly in line with previous quarters, with the median exposure around 13% of total assets Investments in other financial institutions Investment in domestic sovereign debt Source: QFG (N218 Q1=94) Source: QRS (N218 Q1=1,935) 11

12 The indicator on premiums ceded to reinsurers shows a slight decrease in the median (-.5 p.p.) and an increase in the 75 th percentile (+2.7 p.p.). Reinsurance concentration shows a decrease in the median (-2.7 p.p.) and an increase in the 75 th percentile (+9.3 p.p.) since the previous year. The higher end of the distribution is, however, much higher. 18% 16% 14% 12% 1 8% 6% 4% 2% Reinsurance part of premium Phasing-in of SII data Reinsurance concentration Source: QFG (N218 Q1=95); QFT prior to 216 Insurers derivative holdings remained largely unchanged in Q1, though minor increases have been reported for the upper end of the distribution. Herfindal Hirshman index computed on the exposure towards reinsurance companies. Source: ARS (N217 =1,231) Insurers non-insurance liabilities remain low and close to 4% of total assets (median). Insurers "non-insurance" liabilities Phasing-in of SII data Source: QFG (N218 Q1=97); QFT prior to 216 Source: QFG (N218 Q1=97) 12

13 Insurance (underwriting) risks Level: low Trend: large decrease Insurance risks declined from medium to low level, owing mostly to the fading out of the impact of the natural catastrophes occurred in the third quarter of last year on (re)insurers loss ratios. Life and non-life premium growth remain positive, though some deceleration is observed for most groups. The distribution of life premium growth has shifted slightly down, with median growth going from 5.9% in Q4-217 to 2.6% in Q Annual non-life premium growth remains close to 1% (median), though both the lower and upper percentile have decreased. Premium growth - life Premium growth - non-life Note: Year-on-year change in gross written premiums. Distribution of indicator (interquartile range, median). Source: QFG (N218 Q1=84) The whole distribution of loss ratios has shifted downwards, possibly due to the fading out of the impact of the natural catastrophes occurred in the second half of last year on (re)insurers technical results. Median loss ratio is close to 62%. Note: Year-on-year change in gross written premiums. Distribution of indicator (interquartile range, median). Source: QFG (N218 Q1=79) The catastrophe loss ratio is at -1.1% in Q1-218 due to reserve releases from the previous year. This is after a 217 year-end cat loss ratio of 22% following the losses with natural catastrophes in Q3. Loss ratio (gross) Catastrophe loss ratio Source: QRS (N218 Q1=1,433) Note: Cumulative year-to-date loss ratio. Source: Munich Re 13

14 Market perceptions Level: medium Trend: constant Market perceptions are constant at a medium level. Since the last assessment, insurers stocks have underperformed the overall market, though this has been counterbalanced by an overall positive change in external rating outlooks. Insurance stock prices underperformed the overall market since the previous assessment, for both life and non-life insurance. The range of the distribution of price-to-earnings (P/E) ratio has widened, with the median P/E ratio decreasing to around 13%. This should have been driven by the deterioration in insurers market performance since March. 12% 8% 4% -4% -8% -12% Outperformance of insurance stock prices Insurers' price/earnings ratio Life insurance Non-life insurance Note: Outperformance over 3-month periods vs Stoxx 6. Source: Bloomberg Finance L.P. The whole distribution of insurers CDS spreads has moved slightly upwards since the Q4-217 assessment. Source: Bloomberg Finance L.P. (N=32) No change in external ratings has been observed for insurers since March Insurers' CDS spreads Insurers' external ratings (credit quality steps) 4 2 CQS CQS 1 CQS 2 CQS 3 Source: Bloomberg Finance L.P. (N218 Q1=16) Source: Standard & Poor s via Bloomberg Finance L.P. (N218 Q1=31) 14

15 Positive rating outlooks (5) outnumbered negative outlooks (3) Insurers' external ratings (change in rating outlooks) Positive change Negative change Source: Standard & Poor s via Bloomberg Finance L.P. (N218 Q1=31) 15

16 APPENDIX Level of risk Very high High Medium Low Trend Large increase Increase Constant Decrease Large decrease Arrows show changes when compared to the previous quarter. Description of risk categories Macro risks Macro risk is an overarching category affecting the whole economy. EIOPA s contribution focuses on factors such as economic growth, state of the monetary policies, consumer price indices and fiscal balances which directly impact the insurance industry. The indicators are developed encompassing information on the main jurisdictions where European insurers are exposed to both in terms of investments and product portfolios. Credit risks The category measures the vulnerability of the European insurance industry to credit risk. To achieve this aim, credit-relevant asset class exposures of the (re)insurers are combined with the relevant risk metrics applicable to these asset classes. For instance, the holdings of government securities are combined with the credit spreads on European sovereigns. Market risks Market risk is, for most asset classes, assessed by analysing both the investment exposure of the insurance sector and an underlying risk metric. The exposures give a picture of the vulnerability of the sector to adverse developments; the risk metric, usually the volatility of the yields of the associated indices, gives a picture of the current level of riskiness. The risk category is complemented by an indicator which captures the difference between guaranteed interest rates and investment returns. Liquidity and funding risks This category aims at assessing the vulnerability of the European insurance industry to liquidity shocks. The set of indicators encompasses the lapse rate of the life insurance sector with high lapse rate signalling a potential risk, holdings of cash & cash equivalents as a measure of the liquidity buffer available, and the issuance of catastrophe bonds, where a very low volume of issuance and/or high spreads signals a reduction in demand which could form a risk. Profitability and solvency The category scrutinises the level of solvency and profitability of the European insurance industry. Both dimensions are analysed for the overall industry (using group data) and include a breakdown for the life and non-life companies (using solo data). In detail, the solvency level is measured via solvency ratios and quality of own funds. Standard 16

17 profitability measures for the whole industry are complemented by indicators such as the combined ratio and the return on investments specifically applied to the non-life and life industry respectively. Interlinkages and imbalances Under this section various kinds of interlinkages are assessed, both within the insurance sector, namely between primary insurers and reinsurers, between the insurance sector and the banking sector, as well as interlinkages created via derivative holdings. Exposure towards domestic sovereign debt is included as well. Insurance (underwriting) risks As indicators for insurance risks gross written premiums of both life and non-life business are an important input. Both significant expansion and contraction are taken as indicators of risks in the sector; the former due to concerns over sustainability and the latter as an indicator of widespread contraction of insurance markets. Information on claims and insurance losses due to natural catastrophes also contribute to this risk category. Market perception This category encompasses the financial markets perception of the healthiness and profitability of the European insurance sector. For this purpose, relative stock market performances of European insurance indices against the total market are assessed, as well as fundamental valuations of insurance stocks (price/earnings ratio), CDS spreads and external ratings/rating outlooks. Abbreviations AFG ARS QFG QRS QFT Annual Financial Stability Reporting for Groups Annual Prudential Reporting for Solo Entities Quarterly Financial Stability Reporting for Groups Quarterly Prudential Reporting for Solo Entities Quarterly Fast Track Reporting (pre-solvency II, for around 32 large insurance groups on a best effort basis) Notes - Sample size for the different indicators may vary according to availability and consistency of the reported information. - Vertical dashed lines where displayed in the graphs that signal the structural change in the series driven by the transition from Solvency I to Solvency II reporting. EIOPA Risk Dashboard July 218 European Insurance and Occupational Pensions Authority (EIOPA), Frankfurt, 218. All rights reserved. This report provides an interim risk-update, updating previous Risk Dashboards. Legal basis of this report is Regulation (EU) No 194/21 of the European Parliament and of the Council of 24 November 21 establishing a European Supervisory Authority (European Insurance and Occupational Pensions Authority), and in particular Article 32 (Assessment of market developments) thereof. The charts and analyses found in this report are occasionally based on third party material. EIOPA is not responsible for the accuracy or completeness of such data. Third party material is protected by intellectual property rights such as copyright, tradename or similar rights, and may be subject to other terms and conditions. Therefore, reproduction and further distribution of such material is subject to the permission of that third party. 17